KeyBanc Downgrades EPR Properties: 'We Are Concerned About The Long-Term Growth Trajectory'

Rising interest rates and a pullback in EPR Properties EPR's stock led to a sell-side downgrade this week for the REIT, which owns movie theaters, entertainment destinations, schools and recreational sports properties. 

The Analyst

KeyBanc analyst Craig Mailman downgraded shares of EPR from Overweight to Sector Weight.

The Thesis

A more than 10-percent pullback in EPR shares pushed the implied capitalization rate from 7.4 percent in 2017 to 7.8 percent, and the 50 basis-point upward move in the 10-year Treasury yield — with the likelihood of a further increase — could lead to a period of price discovery and a slower transaction pace in the near-to medium-term, Mailman said in a Wednesday note. (See the analyst's track record here.) 

A $350-million reduction in the investment spending outlook and a $225-million increase in dispo guidance implied by the midpoint of FFO guidance equate to zero net investment in 2018, the analyst said.

"The prospect for a protracted period of price discovery and limited access to the equity market could ultimately impact the 2019 earnings trajectory — we view this as the biggest risk to the story from current levels," Mailman said. 

The Children's Learning Adventure bankruptcy weighed on EPR's 2018 guidance, the analyst said. 

"While the 2018 guidance cut stemmed from credit issues with a previously discussed tenant and the box office has rebounded, we are concerned about the long-term growth trajectory for EPR given the increased cost of capital and the potential for a further upward move in long-term interest rates." 

The Price Action

EPR shares were down about 25 percent over the past year through Wednesday.

The shares were slipping 6.22 percent to $54.02 in the Thursday morning session. 

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